No more student loans? Purdue University proposes selling shares of students’ future income

With student loan debt rising and the threat of new education models looming, Purdue University wants to offer a very different way for students to pay for school: private investors will fund their education, and get paid back as a portion of the students’ future income. It’s called an Income Share Agreement (ISA)—if students earn more than expected after university, they pay back more; if they earn less, they pay less.

It’s something that’s been available on the private market through startups like Pave and Lumni, and from some nonprofits. But Purdue would be a pioneer among major public universities if it actively offers ISAs as an option, which it’s aiming to do starting with students who matriculate in the spring of 2016.

It’s a pet project of Purdue president (and former governor of Indiana) Mitch Daniels, who testified in support of ISAs before the US Congress earlier this year.

“This no-debt, low-risk option is another way we can help keep our land-grant school within financial reach of all qualified students,” Daniels said in a press release. Students would be able to defer payment for years if they don’t reach a certain income threshold.

Proponents of ISAs (paywall) believe they are the future of education financing—although they have a long theoretical history. Economist Milton Friedman laid out the basics in a 1954 book. ISA boosters argue that the current system of student loans can be unnecessarily burdensome, and contributes to the ever-rising cost of an education. ISAs, they argue, have the potential to be fairer for students, and reduce the price of education over time. Ultimately, ISAs could enable students to take bigger career risks.

ISAs currently exist in something of a legal wilderness—Upstart, one of the first startups to offer ISAs, gave up on them last year, blaming the regulatory environment—but there is legislation pending in Congress that would build a regulatory framework around the idea. The bill would set caps on things like the percentage of income collected and the time frame of the agreements.

They would potentially bring sophisticated financial tools to the field of customized student loans, as companies use algorithms that try to predict student potential in an attempt to earn a return for investors.

Detractors argue that these programs amount to making often low income students “indenture themselves to patrons in the investor class,” as Kevin Roose wrote for New York Magazine, with a stark power differential that could leave students at a disadvantage. The programs may also end up favoring people who come from higher socioeconomic backgrounds and who are accepted into certain majors at elite institutions, creating a self-reinforcing cycle that exacerbates income inequality.

There’s also a potential adverse selection problem: Students that expect to earn more may avoid these plans, since they could end up ultimately paying more than with traditional flat-fee tuition.

Purdue still has to select a partner to offer the ISAs it is planning. Its students already have the option to pay back standard loans as a percentage of income, but very few take it, and nationwide very few have chosen to enter ISAs yet. But depending on the success of Purdue’s efforts, this might be the push that advocates for this new model have been waiting for.